Browsing by Author "Limbach, Peter"

We provide evidence that CEO tenure exhibits an inverted U-shaped relation with firm value and M&A announcement returns, consistent with benefits (e.g., experience, learning, relations) and costs (e.g., CEO-firm mismatch, entrenchment, reluctance to change) arising over a CEO’s time in office. Depending on the dynamics of a firm’s economic environment which affect the cost-benefit relation of tenure, we find economically meaningful variation in the point in time at which costs start to outweigh benefits. The documented CEO life cycle is robust to a large set of robustness tests, including various alternative explanations, CEO-firm fixed effects, and nonparametric estimations, and is supported by an analysis of CEO sudden deaths. Economic recessions and regulatory changes in corporate governance as exogenous shocks to the cost-benefit relation of tenure further support our findings.

Our study is the first to provide systematic evidence of a hump-shaped CEO tenure-firm value relation. Cross-sectionally, firm value starts to decline after fewer years of CEO tenure in more dynamic industries, if CEOs are less adaptable to changes, and in the presence of greater labor market frictions. Overall, the dynamics of CEO-firm match quality appear to be a first-order driver of the CEO tenure-firm value association, as explained by CEO characteristics (adaptability), firm/industry characteristics (dynamism), and labor market characteristics that facilitate optimal matching between firms and CEOs.

This study suggests that the effect of CEOs on the firms they run varies over time. We document an inverted U-shaped relation between CEO tenure and firm value as well as M&A announcement returns, consistent with the posited net effect of benefits (e.g., learning, relations) and costs (e.g., aversion to change, entrenchment) arising dynamically over the CEO’s time in office. We find economically meaningful variation in the point in time at which costs of tenure start to outweigh benefits depending on a firm’s economic environment that affects costs and benefits of tenure. Nonparametric estimations, exogenous shocks to the cost-benefit relation of tenure, and an analysis of CEO sudden deaths further support our findings.